Pound Shrugs Off Dismal UK Retail Sales

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The British pound is showing slight losses in the Thursday session. In North American trade, GBP/USD is trading at 1.3175, down 0.22% on the day. On the release front, British retail sales declined 0.8%, well below the forecast of -0.1%. In the US, unemployment claims plunged to 222 thousand, well below the estimate of 240 thousand. Manufacturing data was also strong, as the Philly Fed Manufacturing Index jumped to 27.9, crushing the estimate of 21.9 points. On Friday, the UK releases Public Sector Net Borrowing, with the deficit expected to climb to GBP 5.7 billion. The US will release Existing Home Sales and Fed Chair Janet Yellen speaks at an event in Washington.

The British consumer is feeling squeezed, with inflation running above wage growth. Although Britain's labor market remains tight, strong employment picture has failed to translate into strong wage growth. This is even more perplexing in the case of the UK, where inflation is running at clip of 3 percent, well above the Bank of England's target. When inflation is taken into account, wages actually declined 0.4% compared to a year ago. Consumer are also facing more expensive imports, with the British pound losing 12 percent in value since the Brexit vote in June 2016. September retail sales reflected a downturn in consumer spending, with a sharp decline of 0.8 percent, the highest decline since May. The BoE is widely expected to raise rates at the November 2 meeting, but some BoE policymakers remained concerned that the economy is showing signs of weakness and a rate hike should be postponed.

Are the Brexit talks dead in the water? The two sides have little progress to show after several rounds of negotiations. Prime Minister Theresa May is keen to talk trade with the Europeans, but the latter have conditioned trade talks on progress being reached on a number of issues, such as Britain's payment when it leaves the European Union, the status of the border with Northern Ireland and the jurisdiction of the European Court of Justice on European citizens living in the UK. The two sides remain far apart on all of these issues, and each party has criticized the other for lack of flexibility The lack of progress means that the possibility of a 'hard Brexit', in which Britain would leave with no deal being reached, is growing. BoE Governor Mark Carney acknowledged on Tuesday that the Bank has made contingency plans in case there is no agreement. However, British businesses are lobbying hard for an agreement, and want a 2-year interim period, such as a temporary customs union with the EU, in order to soften the blow of leaving the EU.

The markets are keeping a close eye on who will replace Janet Yellen as head of the powerful Federal Reserve. Yellen is due to finish her 3-year term in February 2018. Yellen is apparently interested in serving a second term, but President Trump likely has other ideas. Trump has not been complimentary towards Yellen, although Yellen can point to an impressive resume. She has ended quantitative easing, raised interest rates and started to unwind the Fed's balance sheet. Trump's shortlist includes Jerome Powell, Kevin Warsh and John Taylor. Trump may lean towards Taylor, an economist who is considered more hawkish on policy than Yellen. Under Taylor, interest rates would likely move substantially higher than the current 1.25%, and a rate hike early in 2018 could strengthen the US dollar.

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